Can a Receiver Retake Possession of the Property if a Bankruptcy is Dismissed?

by Ervin Cohen & Jessup LLP
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QUESTION: I was appointed receiver for a business. Shortly after my appointment the owners put the business into bankruptcy and I turned over possession to the debtor. I was not discharged as receiver. I just learned that the bankruptcy was dismissed. Can I retake possession of the business as receiver and once again operate it? I am an equity receiver and I am setting up a claims procedure. I know some creditors and investors have filed suit against third parties to recover their losses. Can I consider these possible third party recoveries in fashioning the claims procedure and ultimately paying claims? a receiver appointed by a court in California in a contentious case. One of creditors has threatened to sue me in Nevada were he is located. How can this creditor sue me? I am a receiver appointed by the Court!

ANSWER: Probably. It depends on what the order dismissing the bankruptcy says and what happened during the bankruptcy proceeding. Section 349(b)(1)(A) of the Bankruptcy Code provides: “Unless the court, for cause, orders otherwise, a dismissal of a case other than under section 742 of this title- (1) reinstates – (A) any proceeding or custodianship superseded under section 543 of this title”. A custodianship includes a receivership or an assignee under a general assignment for the benefit of creditors. 11 U.S.C. §101 (11). Therefore, dismissal of the bankruptcy would reinstate the receivership. See, In re Parrish, 275 B.R. 424, 433 fn. 10 (Bankr. D. Dist. Co. 2002) [“Dismissal additionally reinstates any state receivership or assignment for the benefit of creditors proceeding.”]. However, you need to review the dismissal order to make sure that in dismissing the bankruptcy the court did not, for some reason, order that the receivership would not be reinstated because the statute states: “unless the court, for cause, orders otherwise”. Additionally, you need to determine what happened during the bankruptcy proceeding. To the extent the business or its assets were sold, transferred, liened and or foreclosed on during the bankruptcy, that activity would remain valid and would affect the reinstated receivership. For example, if a secured creditor got relief from the automatic stay and foreclosed on business assets or assets were sold during the bankruptcy, that would affect what reverts into the receivership, if anything, upon dismissal of the bankruptcy. See, In re Sports & Science, Ind., Inc., 95 B.R. 745, 747 (Bankr. C.D. Cal. 1989) where the court states that the purpose of §349 is to “undo the bankruptcy case, as far as practicable, and to restore all property rights to the position in which they were found at the commencement of the case”. The court notes, however, that “transfers made in accordance with the Bankruptcy Code or orders of the court” would not be unwound. See also, In re Searles, 70 B.R. 266, 270 (D.R.I. 1987) [“the ‘property of the estate’ that reverts in its prior owners after dismissal includes only the property left in the estate at the time of dismissal”.].

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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